Construction Price Priority After the 2026 SPC Interpretation II

A contractor completes a major industrial project but remains unpaid. The developer's land and buildings are mortgaged to a bank, and several creditors have begun enforcement. The contractor has a judgment for construction price and wants to rely on the statutory construction price priority right. The Civil Code provides the core priority rule in Article 807, and the Supreme People's Court's construction interpretations explain the conditions and scope.^[1][2][3] The new SPC Interpretation II, effective June 30, 2026, adds current rules on identifying the amount and corresponding project covered by priority, treatment of certain losses, negotiated payment dates, transfers of construction-price claims and proceeds from destroyed, lost or expropriated projects.^[2] The narrow problem is how a contractor should preserve, quantify and prove the priority right before mortgage enforcement or settlement arrangements make recovery harder.

The specific problem#

Qualifying claim and statutory priority scope#

Confirm that the claimant is the contractor entitled to priority. the priority right is tied to qualifying construction-price claims. The contractor should identify: The relevant items include contracting party, project scope, contract validity issues, actual performance, and acceptance or quality status. The earlier SPC Interpretation I confirms that a contractor that contracted directly with the employer can claim priority over the price obtained from discount or auction of the constructed project, subject to the statutory framework.^[3] The legal team should not assume that every subcontractor or claimant automatically has the same priority position. If the project involves illegal subcontracting or qualification borrowing, the claimant's rights require careful analysis. Separate qualifying construction price from non-priority damages. a judgment may award several categories: The relevant items include construction price, interest, liquidated damages, suspension losses, and damages.

Not all categories receive the same priority. The 2021 Interpretation I states that interest, liquidated damages and damages are outside the priority scope.^[3] The 2026 Interpretation II also provides that losses caused by suspension or idle work due to the employer are not included in the priority amount.^[2] The contractor needs to therefore prepare a priority schedule separating: 1. qualifying project price;

1. non-priority monetary claims.

This matters when project value is insufficient to pay everyone. A broad judgment amount is not the same as a priority amount. Identify the exact project to which the priority attaches. the 2026 Interpretation II requires courts to determine the amount of construction price enjoying priority and the corresponding project.^[2] This is a major pleading and evidence point. A contractor working on a multi-building development should identify which unpaid price relates to which building or project component. If the contractor performed work across several parcels, the evidence should allocate value where possible. The claimant should preserve: The relevant items include contract scope, drawings, quantity records, settlement statements, and acceptance documents.

A vague request for priority over "all assets of the developer" is not enough. The right attaches through the construction project, not the debtor's general estate. Time calculation should be addressed before settlement negotiations drag on. the earlier Interpretation I provided an eighteen-month maximum period for exercise of the construction price priority right, calculated from the date the employer should pay construction price.^[3] The 2026 Interpretation II clarifies that where parties later agree to change the payment date due to objective reasons such as extension of the construction period, the contractor may calculate from the changed due date; where the original contract did not set a clear due date but a settlement agreement later does, the agreed settlement due date can become relevant.^[2] Contractors should therefore document payment-date changes carefully.

A casual discussion about "paying later" should not replace a clear written settlement term. Counsel should calendar the priority period independently from ordinary limitation issues. Do not assume that ongoing negotiation indefinitely protects priority. Mortgages do not automatically defeat construction-price priority. the SPC Interpretation I expressly states that the qualifying construction price priority right is superior to mortgage rights and other claims.^[3] That is powerful, but the contractor still has to prove the right and its amount. Before enforcement, obtain: The relevant items include mortgage registration, mortgagee, amount, registration date, project ownership, and other seizures.

The contractor should notify the enforcement court of its priority claim and provide the relevant judgment or evidence. If the bank is enforcing first, procedural coordination becomes critical. A statutory priority that is never asserted effectively can still produce practical delay and dispute. A judgment should make the priority finding as specific as possible. the 2026 Interpretation II states that where a contractor requests confirmation of priority, the court should determine the qualifying amount and corresponding project and state it clearly in the judgment.^[2] Contractors should therefore plead for a specific finding rather than rely on generic wording. The evidence package should enable the court to state: The relevant items are amount, project, and legal basis. If the underlying construction-price litigation is already pending, priority should be addressed before judgment where possible. Trying to establish priority only after other creditors have advanced enforcement can create unnecessary complexity.

Project identification and timing#

Quality remains a central condition. the judicial interpretations link priority to qualifying construction work and quality conditions.^[2][3] A contractor facing quality allegations should preserve: The relevant items include acceptance records, rectification notices, repair history, testing, and expert reports. An owner may use quality disputes to attack both the price and the priority claim. The contractor should distinguish genuine defects from strategic withholding. If repairs are required, document completion and the owner's response. A priority strategy built on an unresolved quality dispute requires careful risk assessment. Transfer of the construction-price claim requires new analysis. the 2026 Interpretation II addresses circumstances in which an assignee of a construction-price claim seeks priority and directs courts to consider factors including project completion/acceptance, settlement, validity of assignment and whether reasonable transfer consideration was paid.^[2] This is significant for factoring and distressed-debt investors. A buyer of a contractor receivable should not assume priority transfers automatically as a simple accessory. Diligence should examine:

The relevant items include underlying contract, project status, settlement, priority period, assignment, and purchase price. The assignee's recovery model should therefore distinguish ordinary receivable value from priority-enhanced value. Destruction, loss or expropriation does not necessarily eliminate value. the 2026 Interpretation II provides that where the construction project is destroyed, lost or expropriated, a contractor may claim priority against corresponding insurance proceeds, compensation or expropriation compensation under the specified conditions.^[2] This expands the practical asset map. If a project is damaged or acquired by government, the contractor should trace substitute proceeds promptly. The legal team should identify: The relevant items include insurer, compensation recipient, payment status, and seizures. A priority right can lose practical value if substitute proceeds are distributed before the contractor asserts its claim. Settlement agreements can preserve or weaken the right. contractors often settle unpaid price with extended instalments. The settlement should state:

The relevant items include recognized principal, payment dates, project, whether existing security and priority rights are preserved, and default consequences. The 2026 interpretation's treatment of later agreed payment dates makes precise drafting important.^[2] The contractor needs to avoid broad release language that could be argued to waive or limit rights unintentionally. The employer may request an express waiver of priority to support refinancing. Any such waiver should be reviewed carefully, especially because the interpretations restrict agreements that harm construction workers' interests.^[3] Case study: industrial park project with mortgage debt. assume a contractor is owed RMB 80 million for a completed industrial plant. The project has: The relevant items are bank mortgage of RMB 150 million, market value of RMB 190 million, and contractor judgment including RMB 70 million construction price and RMB 10 million interest/damages. The contractor should not claim RMB 80 million priority indiscriminately. A stronger enforcement position would:

1. identify the RMB 70 million qualifying amount;
2. link it to the plant;
3. confirm the priority finding in judgment;
4. monitor the eighteen-month timing analysis;
5. intervene in project enforcement;
6. treat the remaining RMB 10 million as ordinary claim. The bank and contractor can then negotiate using legally differentiated claims. Project records should be designed for priority before any dispute. contract administration should preserve: The relevant items include payment milestones, due dates, settlement submissions, acceptance, project allocation, and variation records. A contractor that cannot show when payment became due or which work belongs to which project can create difficulty for itself years later. The 2026 interpretation makes project identification and payment-date evidence even more important.^[2] Owners should maintain equally clear records to prevent unsupported priority claims.

Mortgages, judgment drafting and claim transfers#

Enforcement strategy should map all competing claims. the contractor should identify: The relevant items include mortgages, tax claims, other contractor claims, employee claims, seizures, and pre-sale or purchaser interests. The statutory priority is significant, but project enforcement can involve multiple protected interests. Counsel should therefore calculate expected recovery after sale costs and competing superior or specially protected claims. The objective is not merely to obtain a legal declaration but to convert it into cash. Mortgagee negotiations should begin from a shared valuation model. a bank mortgagee and contractor may both have strong legal rights but different assumptions about project value. Before a contested auction, the parties should obtain reliable valuation and estimate: The relevant items include sale price, taxes, enforcement cost, qualifying priority amount, and mortgage balance.

If the expected sale proceeds are insufficient, early negotiation can avoid years of procedural conflict. The contractor should not waive priority merely to accelerate sale unless the economic trade-off is clear. Partial payments should be allocated carefully. during a long project, the employer may make payments without specifying which invoices or work items they satisfy. That can affect the remaining construction-price balance and the priority calculation. The contractor needs to maintain a payment ledger tied to: The relevant items are progress claims, certified amounts, and final settlement.

Where the parties later agree an allocation, document it. An unclear ledger can create a dispute over whether the unpaid balance relates to qualifying construction price or other items. Project division can create priority-allocation problems. large developments may be built in phases. If one contract covers several phases but only one remains unpaid, the contractor should identify the corresponding project value. The 2026 interpretation's emphasis on the "corresponding project" makes this factual allocation important.^[2] The contractor should preserve quantity and settlement records by phase or building. A claim that spreads one unpaid balance across unrelated property can invite challenge from mortgagees and purchasers. Sale of units or completed portions can complicate enforcement. real-estate projects may include units already sold to purchasers. Contractors should identify ownership and purchaser status before seeking auction of the project.

The legal system protects multiple interests, and priority enforcement may need to account for rights of purchasers or other protected parties. The contractor's asset map should therefore distinguish unsold developer-owned property from property already transferred. This analysis should occur before asking the court for broad enforcement measures. Refinancing requests should trigger an immediate priority review. developers sometimes ask contractors to subordinate, waive or confirm the absence of priority rights so a bank can refinance the project. The contractor needs to not sign such documents casually. The SPC interpretations restrict waivers or limitations that harm construction workers' interests.^[3] Even where a waiver may be commercially negotiable, the contractor should quantify the value surrendered and obtain replacement security or payment. A refinancing can be an opportunity for recovery if the contractor conditions consent on partial payment.

Settlement, substitute proceeds and project records#

Contractor receivable transfers require diligence by both seller and buyer. the 2026 interpretation's treatment of assignees means contractors selling receivables should prepare a complete file.^[2] The assignee should verify: The relevant items include project quality, settlement, payment date, priority period, and underlying evidence. A discounted receivable may be attractive because of priority, but only if the statutory conditions remain supportable. The contractor should also understand whether assignment affects relationships with the owner or financing banks. Substitute proceeds should be traced immediately. where a project is expropriated, destroyed or insured, the contractor should identify the resulting compensation or insurance proceeds. The 2026 interpretation recognizes priority claims against specified substitute proceeds.^[2] The practical risk is dissipation before the contractor acts. Counsel should obtain information about: The relevant items include payer, amount, payment account, and timing.

Preservation may be appropriate where proceeds are about to be distributed. Judgment drafting should anticipate enforcement. a judgment that merely says "contractor enjoys priority according to law" may create later argument. The contractor needs to seek a dispositive section that identifies amount and project consistently with the 2026 interpretation.^[2] Pleadings, appraisal and settlement evidence should be designed to allow that specificity. The litigation team should think like the enforcement judge while trying the merits. Bankruptcy of the developer changes the forum but not the need for precision. if the developer enters bankruptcy, the contractor should file its claim and assert priority within that proceeding. The creditor should provide: The relevant items include judgment, contract, settlement, project identification, and priority calculation.

Bankruptcy can bring mortgagees and contractors into one collective process. A vague priority claim will still be challenged. The contractor should therefore prepare the same evidence package even if individual enforcement stops. Internal contract administration should track the priority clock. construction companies should add priority review to project closeout. When a payment becomes overdue, the system should alert legal and finance teams. The project manager should not have sole responsibility for tracking legal time limits. A centralized calendar can prevent valuable statutory rights from expiring while commercial teams continue informal negotiation. Final enforcement model. before filing or settlement, the contractor should produce one table showing: The relevant items include qualifying amount, non-priority amount, project, due date, priority deadline, mortgages, estimated sale value, and expected net recovery. That table turns the legal doctrine into an enforcement decision.

Refinancing, bankruptcy and evidentiary preservation#

Fixed-price and settlement disputes can affect the priority amount. the 2026 interpretation addresses current issues concerning fixed total price contracts and settlement.^[2] Where the underlying project price remains disputed, the priority amount cannot be assumed. The contractor should resolve: The relevant items include contract price mechanism, lawful adjustment, accepted variations, and settlement. Only then can it present a reliable qualifying amount. A priority claim does not convert an unproven price claim into a proven one. Evidence preservation before site handover can be decisive. the 2026 interpretation addresses site and document handover after contract termination and recognizes evidence-preservation mechanisms before the contractor leaves the site.^[2] A contractor facing termination should consider preserving: The relevant items include completed quantities, concealed works, materials, quality condition, and project documents.

Once the owner controls the site, some evidence becomes difficult to recreate. This is particularly important if the unpaid price and priority will later depend on appraisal. Quality guarantee funds should be separated from immediately due price. construction contracts often retain quality guarantee funds. The contractor needs to identify when those funds become repayable and whether they are currently due. The 2026 interpretation contains rules on the basis and timing of quality guarantee funds in contract termination or invalidity scenarios.^[2] The priority schedule should not treat future retention identically to currently due construction price without analysis. Owners should audit contractor priority exposure before refinancing or sale. the priority right is not only a contractor issue. A developer planning refinancing, asset sale or restructuring should identify unpaid contractor claims before telling lenders the mortgage position. The owner should maintain: The relevant items include settlement status, disputes, priority deadlines, and waivers.

A bank discovering a large construction priority late in financing may reduce proceeds or require settlement. Bank diligence should independently verify construction-price exposure. mortgage lenders should not rely solely on the developer's statement that contractors are paid. Request: The relevant items include main construction contracts, payment certificates, final accounts, and contractor confirmations where appropriate. The 2026 rules increase the importance of identifying specific project and priority amount.^[2] A lender that understands contractor exposure can structure disbursements and payoff conditions more safely.

Three-party solutions and final enforcement economics#

Settlement sequencing can create a three-party solution. where project value is sufficient but liquidity is short, owner, contractor and mortgage bank may negotiate coordinated refinancing. For example: The relevant items include new bank funds, contractor receives agreed payment, priority is released to that extent, and old mortgage is refinanced. The documents should make releases conditional on actual payment. This can convert a priority conflict into a financing closing rather than prolonged enforcement. Final contractor decision. the contractor should know the qualifying amount, project, deadline, competing mortgage debt and expected sale value before accepting any settlement or waiver. Without those numbers, it cannot price the right it is giving up. Final filing discipline. the contractor should keep a complete priority file with the contract, settlement, due-date evidence, acceptance records, judgment and mortgage search. If the right later moves into bankruptcy or a different enforcement proceeding, that file should allow new counsel or the court to reconstruct the claim without relying on project-manager memory.

Final economic comparison. before litigation or settlement, the contractor should compare expected priority recovery with the value of any immediate discounted payment offered by the owner or mortgagee. Time, enforcement cost and project-sale risk can make a negotiated payment economically superior even where the contractor has a strong statutory position. Enforcement handoff. if the matter moves from merits litigation into enforcement or bankruptcy, the contractor should hand over a written priority memorandum identifying the qualifying amount, corresponding project, due-date calculation, mortgages, prior payments and every document supporting the claim. This avoids losing value when a new court or administrator reviews the file.

Priority-right strategy should begin during final-account negotiation, not after judgment. when the parties negotiate settlement, the contractor should maintain a separate schedule of qualifying construction price and the corresponding project. If the owner proposes to roll construction price, interest and damages into one settlement number, counsel should consider whether that aggregation makes later priority proof harder. A settlement can acknowledge the underlying construction-price component explicitly and state the project to which it relates. Project financing parties can reduce priority disputes through payment controls. banks financing construction can use monitored accounts, progress-payment verification and contractor confirmations to reduce the risk that unpaid qualifying construction price accumulates unnoticed. Contractors benefit when financing structures provide visibility into payment sources, while lenders benefit from knowing potential priority exposure before mortgage enforcement. This is especially important on projects where the mortgage value is close to total construction cost.

Contractors should be cautious when accepting equity or property instead of cash. a developer may propose shares, apartments or other assets in settlement. The contractor should understand whether accepting alternative consideration extinguishes or changes the construction-price claim and priority position. The economic value, title and transfer restrictions of the substitute consideration should be verified before any release. A nominally full settlement can be worse than a strong priority claim if the substitute asset is illiquid or encumbered.

Conclusion#

Construction price priority remains one of the most powerful recovery tools available to contractors, and the 2026 SPC Interpretation II adds important current rules on amount, project identification, payment-date changes, claim assignment and substitute proceeds.^[2] The practical rule is: separate qualifying construction price from ordinary damages, identify the exact project, calendar the priority period and obtain a specific judicial finding before other creditors consume the enforcement value.

Legal and regulatory sources#

^[1] Civil Code of the People's Republic of China, Article 807, official NPC legal database: https://flk.npc.gov.cn/ ^[2] Supreme People's Court, Interpretation II on Issues Concerning the Application of Law in Construction Contract Disputes, effective June 30, 2026: https://www.court.gov.cn/fabu/xiangqing/504221.html ^[3] Supreme People's Court, Interpretation I on Issues Concerning the Application of Law in Construction Contract Disputes, especially Articles 35-42: https://www.court.gov.cn/zixun/xiangqing/282111.html

General legal information only; not legal advice for a specific construction dispute.